Multiple tax issues resolved: Share allotment without cash inflow escapes Section 56(2)(viib), non-deduction disallowances clarified, and bad debt write-offs upheld.

ORDER

M. Balaganesh, Accountant Member.- These assessee’s twin appeals for assessment years 2013-14 & 2017-18, arise out of the orders of Commissioner of Income Tax/National Faceless Appeal Centre (for short, “Ld. CIT(A)/NFAC”), dated 12.12.2025, having DINs and order nos. ITBA/NFAC/S/250/2025-26/1083623305(1) & ITBA/NFAC/S/250/2025- 26/1083623548(1), against the assessment orders, involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), passed by the Assessing Officer (hereinafter referred to as, ” Ld. AO”).

2. Ground No. 1 raised by the assessee is challenging the confirmation of addition made u/s 56(2)(viib) of the Act in the sum of Rs. 3,59,22,304/-.

2.1 We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of providing coaching to students for admission to various institutions of management, engineering, fashion designing, law etc through its own centres and through franchises. The assessee also provides vocational training services to some companies. The assessee has declared revenue from operations of Rs. 11,65,19,97,666/- and profit before tax of Rs. 9,99,87,601/- in its profit and loss account. The assessee company entered into an agreement on 12.11.2011 to acquire the business of G K Publications for a fixed consideration of Rs. 33,71,88,713/- out of which an amount of Rs. 5,77,35,982/- was to be discharged by issuing shares of C L Educate Limited (assessee company) to the promoters of G K Publications Pvt. Ltd. . The assessee company allotted 83,104 shares to the promoters of G K Publications Pvt. Ltd. on 01.05.2012 and 31.10.2012. Since the allotment of shares had happened during the year under consideration, the ld. AO sought to trigger the taxable event by applying the provisions of section 56(2)(viib) of the Act. The promoters of G K. Publications Private Limited are Mr. Rakesh Mittal and Mrs. Poonam Mittal to whom 83,104 shares were allotted by the assessee as under:

2.2 The assessee was asked to file the details of price at which the said shares were issued and also the details of valuation of shares as per Rule 11 UA (2) of the Income Tax Rules, vide notice u/s 142(1) of the Act dated 09.09.2015. The assessee produced the name and address of the shareholders to whom the shares of the assessee company were allotted together with their PANs, date of allotment, number of shares allotted and also referring to the corresponding clause in the acquisition agreement of G K. Publications Private Limited. The assessee submitted that first tranche issue of 47,416 shares were issued on a preferential basis at the price of Rs. 621/- per share includes premium of Rs. 611/- per share. The assessee also furnished the valuation report dated 26.04.2012 prepared by Ashish Mishra & Co. wherein the issue price was arrived using Discounted Cash Flow Method (DCF Method). The said valuation report was rejected by the Ld. AO on the following grounds:-

The Ld. AO accordingly proceeded to make an addition u/s 56(2)(viib) of the Act by noting that the premium charged by the assessee is much above the fair market value of the shares and added the sum of Rs. 3,59,22,304/-.

2.3 Before the Ld. CIT(A), the assessee submitted that the provisions of section 56(2)(viib) per se could not be made applicable as no consideration for issue of shares was received during the year by the assessee and that the consideration for issue of shares was received in F.Y. 2011-12 relevant to A.Y. 2012-13. It was also submitted that the Ld. AO is not empowered to change the valuation method adopted by the assessee. The Ld. CIT(A), however, did not heed to the contentions of the assessee and upheld the action of the Ld. AO.

2.4 We find that admittedly no money/consideration was received by the assessee company for issuance of shares. The shares that were allotted on 01.05.2012 and 31.10.2012 were merely a mode of discharging the part consideration for acquisition of business undertaking of G K Publications Private Limited by the assessee company pursuant to the agreement dated 12.11.2011. There is absolutely no cash inflow of funds for the assessee company for issue of shares during the year under consideration. Hence, provisions of section 56(2)(viib) of the Act could not be applied at all. At the cost of repetition, we would like to state that only the shares were allotted during the year pursuant to acquisition agreement dated 12.11.2011. The shares were allotted for consideration other than cash. Hence, there was no receipt of money at all by the assessee company for issuance/allotment of shares to Mr. Rakesh Mittal and Mrs. Poonam Mittal. Hence, we hold that provisions of section 56(2)(viib) of the Act cannot be made applicable at all in the instant case. Hence, there is no requirement to get into the valuation method which has been disputed by the Ld. AO. Accordingly, Ground No. 1 of the assessee is allowed.

3. Ground No. 2 raised by the assessee is challenging the confirmation of disallowance of Rs. 11,61,86,712/- on account of doubtful advances written off.

3.1 We have heard the rival submissions and perused the material available on record. During the course of assessment proceedings, the assessee company was asked to provide complete details with regard to doubtful advances written off. The assessee was also asked to furnish details regarding names, addresses, PANs of the parties in respect of which advances had been written off and the reason for writing them off. The details furnished by the assessee are tabulated in page 25 of the assessment order which is as under:

3.2 Out of the aforesaid table, the disputed issue is only with regard to doubtful advances written off in the sum of Rs. 11,61,86,712/- in respect of amounts recoverable from Carrier Launcher Education Foundation (CLEF). We find that assessee in F.Y. 2010-11 & 2011-12 provided infrastructure facilities and licenses to CLEF and recognised the corresponding fee as taxable income in those years. Due to non-receipt of payment from CLEF, the unreceived amount was subsequently transferred to CLEF’s loan account and interest was charged thereon and such interest was duly offered to tax as income prior to A.Y. 2013-14. The details of the amount receivable from CLEF are tabulated as under:-

3.3 During the year under consideration, this amount of Rs. 11,61,86,712/- was treated as irrecoverable from CLEF and was written-off under the head of “doubtful advances written-off”. Hence, it could be seen that the assessee had duly complied with the provisions of section 36(2) of the Act by duly offering to income with regard to the fees and interest thereon in earlier years and had duly written-off the amounts receivable from CLEF in its books of accounts by crediting to the concerned parties account which effectively is bad debts written-off and hence the assessee would be entitled for deduction for the same u/s 36(1)(vii) of the Act. It in incorrect on the part of lower authorities to state that it is not a trade debt which has been written-off. In the instant case, the trade debt on it becoming irrecoverable had been converted into loan and interest was charged on such loan. Both the trade debt as well as the interest income had been already offered to tax by the assessee in earlier years. Hence assessee would be entitled to claim deduction for the irrecoverable portion of Rs. 11,61,86,712/- u/s 31(i)(vii) of the Act. Accordingly, Ground No. 2 raised by the assessee is allowed.

4. Ground No. 3 raised by the assessee is challenging the confirmation of disallowance of Rs. 1,41,71,192/- u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules.

4.1 We have heard the rival submissions and material placed on record. It is not in dispute that there was absolutely no exempt income derived by the assessee or claimed by the assessee. Hence, the provisions of section 14A of the Act per se, could not be made applicable. Reliance in this regard has been rightly placed by the Ld. AR on the decision of the Hon’ble Jurisdictional Delhi High Court in the case of Pr. CIT (Central) v. Era Infrastructure (India) Ltd 448 ITR 674 (Delhi). Respectfully following the same, the Ground No. 3 raised by the assessee is allowed.

5. Ground No. 4 raised by the assessee pertains to challenging the confirmation of addition of Rs. 1,88,42,329/- on account of “liabilities no longer required” written-back.

5.1 We have heard the rival submissions and perused the material available on record. During the year consideration, the assessee credited the sum of Rs. 3,15,79,708/- under “liabilities no longer required” as part of “other income”. Out of which the sum of Rs. 1,88,42,329/- was reduced by the assessee in the computation of total income. The break-up of Rs. 1,88,42,329/- which was reduced from the computation of total income together with reasons for exclusion is as under:

5.2 The submissions made by the assessee before the Ld. CIT(A) in this regard are reproduced herein:-

“Ground No.4

Addition of Rs.1,88,42,329/- by the Assessing Officer u/s on account of “Liabilities No Longer Required” is contrary to facts and law and therefore, the addition is liable to be deleted.

AO has dealt with this issue in Para 6.1 at Page 44 and onwards of the assessment order. His findings are as under:

AO has not understood this issue at all and therefore has made additions on presuming the things without taking any clarifications from the assessee. AO did not discuss the issue at all with the assessee during the assessment proceedings and has made the addition at the time of writing the assessment order.

The facts here are:

Kindly refer to Page 105 of the Paper Booklet where this item is shown as income in Note 24 of ‘Other Income’.

The facts pertaining to this issue are:

The Ld. CIT(A) however did not accept the aforesaid contentions and proceeded to upheld the action of the Ld. AO.

5.3 From the detailed explanation given by the assessee, we are convinced that reduction from total income of Rs. 1,88,42,329/- claimed by the assessee is emanating merely out of book entry of reversal of advance fees/unearned revenue. The reason for such reversal is also duly explained by the assessee. It is a fact that no deduction has been claimed by the assesee with regard to this transaction in any of the earlier years. Hence, the provisions of section 41(1) of the Act could not be made applicable at all. No benefit has been derived by the assessee qua this transaction. On the contrary, the assessee has lost the moneys due to absconding of Dubai franchisee. Hence, there is no benefit either in cash or in kind derived by the assessee out of this transaction. Hence, the provisions of section 28(iv) of the Act also could not be made applicable. Accordingly, the Ground No. 4 raised by the assessee is allowed.

6. Ground No. 5 raised by the assessee is challenging the confirmation of disallowance of loan processing charges in the sum of Rs. 19,04,795/-.

6.1 We have heard the rival submissions and perused the material available of record. During the year under consideration, the assessee paid Rs. 19,04,795/-as loan processing charges to Kotak Mahindra Bank for the purpose of obtaining loans/overdraft facility from the bank and claimed the same as revenue expenditure. The loan sanction letter is enclosed in Page 197 to 204 of the Paperbook. The Ld. AO sought to disallow the same on the ground that it is capital in nature as the loan period is for longer duration and it creates enduring benefits to the assessee. This action of the Ld. AO was upheld by the Ld. CIT(A) in principle. The Ld. CIT(A) further held that the Hon’ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) had held that loan processing charges are not recurring operational expenses and that they are one time charge for the acquisition of the financial facility itself.

6.2 In our considered opinion, the loan processing charges paid for obtaining loan partakes the same character of interest on loan as per section 2(28A) of the Act which defines interest to include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. It is not in dispute that the loan facility availed by the assessee had been utilised wholly and exclusively for the purpose of business of the assessee. The interest expenditure on loans had been duly allowed by the Ld. AO. Accordingly, the one time loan processing fee, as stated earlier, partakes the character of interest payment and hence would be allowable expenditure. We direct the Ld. AO accordingly. Ground No. 5 raised by the assessee is allowed.

7. Ground Nos. 6 & 7 raised by the assessee are challenging the confirmation of disallowance made u/s 40(a)(ia) of the Act in respect of “Royalty Expenses” of Rs. 14,33,356/- and advertisement/ promotion expenses of Rs. 7,48,366/-.

7.1 We have heard the rival submissions and perused the material available on record. During the year under consideration, the assessee made payment of royalty amounting to Rs. 14,33,356/- to C.L. Media Private Limited which is wholly owned subsidiary of the assessee company without deduction of tax at source. It was submitted before the Ld. AO that the payee i.e., C.L. Media Private Limited included the said amount in its taxable income. The Ld. AO proceeded to disallow the same u/s 40(a)(ia) of the Act which was upheld by the Ld. CIT(A). We find the second proviso to section 40(a)(ia) r.w. second proviso to section 201(1) of the Act makes it very clear that once the payee offers the receipt in its taxable income, the said payment made by the assessee cannot be a subject matter of disallowance u/s 40(a)(ia) of the Act. Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional Delhi High Court in the case of CIT v. Ansal Land Mark Township (P.) Ltd. 377 ITR 635 (Delhi). Accordingly, we direct the Ld. AO to delete the disallowance made u/s 40(a)(ia) of the Act in respect of royalty expenditure of Rs. 14,33,356/-.

7.2 With regard to Advertisement/publicity and Business Promotion Expenditure of Rs. 7,48,366/-, the same were paid to the following parties:-

The aforesaid payments were made admittedly without deduction of TDS hence, the Ld. AO proceeded to disallow the same u/s 40(a)(ia) of the Act which was upheld by the Ld. CIT(A). The Ld. AR before us submitted that only 30% disallowance should have been made as against 100% disallowance. On perusal of the provisions of section 40(a)(ia) of the Act, we find that 30% disallowance was proposed only from 01.04.2015 and the same cannot be made applicable for the year under consideration. Similar issue was subject matter of consideration by the Hon’ble Supreme Court of India with regard to the amendment brought in by the Finance (No. 2) Act, 2004 w.e.f 01.04.2005 for applicability to earlier years. The Hon’ble Supreme Court in the case of Shree Choudhary Transport Company v. ITO  426 ITR 289 (SC) categorically held that the said amendment would be applicable only from A.Y. 2005-06 and not earlier. Applying the same analogy, we hold that the 30% disallowance contemplated u/s 40(a)(ia) of the Act could be made applicable only from A.Y. 2015-16 onwards and not earlier. Accordingly, the plea of the Ld. AR in this regard is rejected.

7.3 The Ground No. 6 raised by the assessee is allowed and Ground No. 7 raised by the assessee is dismissed.

8. The Ground No. 8 raised by the assessee is challenging the confirmation of disallowance of “Prior Period Expenses” of Rs. 32,87,466/-.

8.1 We have heard the rival submissions and perused the material available on record. During the year under consideration, the assessee offered prior period income of Rs. 1,05,36,848/- to tax and claimed Prior Period Expenses of Rs. 32,87,466/- as revenue expenditure. The details of the same are reflected in note no. 32 of audited financial statement enclosed in page 66 of the paperbook. The Ld. AO sought to disallow the prior period expenses on the ground that the assessee was not able to prove that the said expenditure does not relate to the year under consideration. This action of the Ld. AO was upheld by the Ld. CIT(A). We find from the said details enclosed in page 66 of the paperbook, apart from list and the break-up of Prior Period Expenses, the assessee had not provided any evidence to prove that the said expenditure/liability got crystalized during the year so as to fall within the ambit of Prior Period Expenses. Even before us, no evidence has been brought on record by the Ld. AR to prove that the said expenditure though pertained to earlier year had crystalized during the year. Hence, we do not deem it fit to interfere in the order of the Ld. CIT(A) confirming the disallowance. Accordingly, Ground No. 8 raised by the assessee is dismissed.

9. In the result, the appeal of the assessee in ITA No. 120/Del/2026 for A.Y. 2013-14 is partly allowed.

10. Ground No. 1 raised by the assessee is challenging the confirmation of disallowance of bad debts of Rs. 34,10,731/-.

10.1 We have heard the rival submissions and perused the material available on record. During the year under consideration, the assessee claimed deduction on account of bad debts written-off in respect of amounts not recoverable from various students which were duly written in the books of accounts. It was submitted that the income corresponding to such debts had already been recognised and at the time of enrolment of students in accordance with the consistent policy adopted by the assessee. Accordingly, it was pleaded that the claim of deduction of the assessee is in compliance to provisions of section 36(2) r.w.s 36(i)(vii) of the Act. The Ld. AO in the course of assessment proceedings sought to examine the veracity of the claim of bad debts written-off by the assessee. The assessee gave the list of 3,500 students from whom moneys were not recovered and which were subject matter of total claim of bad debts written-off. Out of such list, the Ld. AO selected 11 students and issued notice u/s 133(6) of the Act on a sample basis. Out of this, responses were received only from 2 students wherein one student confirmed that the amount was not paid and the other stated that the amount was paid to another entity (franchise partner of the assessee) and not to the assessee. Based on this, the Ld. AO proceeded to make ad hoc disallowance of 1/11^th of the total amount of bad debts claimed by the assessee in respect of students in India and disallowed the sum of Rs. 34,10,731/-in the assessment. This action of the Ld. AO was upheld by the Ld. CIT(A).

10.2 The aforesaid narration of facts are not in dispute. We find that the very basis of disallowance made by the Ld. AO is out of mere surmise and conjecture. The assessee on its part had furnished the complete list of students in pages 102 to 105 of the Paperbook in respect of bad debts Dubai. Similarly, the assessee has furnished complete list of students and the income booked qua each student in pages 116 to 202 of the Paperbook which were subject matter of bad debts written-off. Hence, it could be seen that the assessee had duly complied with the provisions of section 36(2) r.w.s. 36(i)(vii) of the Act and hence, would be eligible for deduction on account of bad debts written-off. Either way there is absolutely no basis for the Ld. AO to make ad hoc disallowance of 1/11^th of bad debts claimed. The Ld. AR rightly placed reliance on the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd. v. CIT 323 ITR 397 (SC) in respect of his contentions qua the issue of bad debts written-off. Respectfully following the same, Ground No. 1 raised by the assessee is hereby allowed.

11. Ground No. 2 raised by the assessee is challenging the confirmation of disallowance of Rs. 3,21,371/- on account of commission paid to non-executive Directors for non-deduction of tax at source.

11.1 We have heard the rival submissions and perused the material available on record. It is not in dispute that commission to non-executive Directors has been provided for in the books on accrual basis and the same was not subjected to deduction of tax at source. The TDS provisions were complied with at the time of making payment of commission which happened in the subsequent year. Hence, as on 31.03.2017, disallowance u/s 40(a)(ia) of the Act would come into operation for the said transaction. However, we find that law has been amended in section 40(a)(ia) of the Act w.e.f. 01.04.2015, wherein only 30% of such expenditure could be subjected to disallowance. This amendment has not been taken note by the lower authorities in the instant case and hence, we modify the order of the Ld. AO and direct the Ld. AO to sustain the disallowance only to the extent of 30% of Rs. 3,21,371/-. Accordingly, the Ground No. 2 raised by the assessee is partly allowed.

12. Ground No. 3 raised by the assessee is challenging the confirmation of disallowance of Rs. 1,18,75,095/- on account of provision for expenses u/s 40(a)(ia) of the Act.

12.1 We have heard the rival submissions and perused the material available on record. As per the consistent accounting practice followed by the assessee, wherefrom the details of the payee(s) with exact sums are not known to the assessee, the assessee would make provisions for expenses at the end of the financial year for which services had already been rendered by the concerned parties to the asssessee. Since the exact details of the payee and the amounts thereon are not known to the assessee, credit is not given to the payees’ account by the assessee and instead credit is given to provision for outstanding liabilities account. While making this provision, no tax was deducted at source by the assessee. The details of the said provisions for expenses are enclosed in pages 232 to 236 of the Paperbook. It is pertinent to note that 30% of such sums are liable for disallowance u/s 40(a)(ia) of the Act which has already been done by the assessee itself suo moto in the computation of income. Hence there is no need to make separate disallowance for the same. The Ld. AO without examining the fact that this disallowance has already been made by the assessee in the return, proceeded to make further disallowance of expenses in the assessment which stood confirmed by the Ld. CIT(A).

12.2 This matter in our considered opinion, requires factual verification by the Ld. AO and hence, we deem it fir and appropriate to restore this issue to the file of Ld. AO for de novo adjudication in accordance with law. Accordingly, Ground No. 3 raised by the assessee is allowed for statistical purposes.

13. Ground No. 4 raised by the assessee is challenging the confirmation of addition made u/s 41(1) of the Act in the sum of Rs. 3,61,24,452/- u/s 41(1) of the Act.

13.1 We have heard the rival submissions and perused the material available on record. During the year under consideration, the assessee had not written-back its liabilities in its books of accounts and accordingly no income was required to be offered on that account in terms of section 41(1) of the Act. In the assessment proceedings, the Ld. AO issued notice u/s 133(6) of the Act to various sundry creditors having balance of more than 10 lakhs. Replies/confirmations were not received in certain cases. And in same cases where the replies were received, the balance shown by the assessee was higher than what is reported by the creditors. Accordingly, Ld. AO presumed that the sundry creditors appear in balance sheet had ceased to exist and subsequently proceeded to add the outstanding balance thereon u/s 41(1) of the Act. This addition was upheld by the Ld. CIT(A). The details of the same are as under:

13.2 At the outset, we find that assessee had continued to show these sundry creditors as outstanding creditors in its balance sheet. The debts due to these parties had been duly acknowledged by the assessee company by reflecting the same as liability. These liabilities had not been written-back to income by the assessee. The Ld. AO had not brought on record any evidence to prove whether any deduction per se was claimed on account of these liabilities. In any event, the assessee had indeed settled the entire liabilities in subsequent years. Hence it could be safely concluded that the said liability had not ceased to exist as on 31.03.2017 so as to apply the provisions of section 41(1) of the Act. Hence, the addition made u/s 41(1) of the Act in the instant case is hereby deleted. Accordingly, Ground No. 4 raised by the assessee is allowed.

14 Ground No. 5 raised by the assessee is general in nature and does not require any specific adjudication.

15. In the result, the appeal of the assessee in ITA No. 121/Del/2026 for A.Y. 2017-18 is partly allowed for statistical purposes.

16. To sum up, the appeal of the asssessee in ITA No. 120/Del/2026, for A.Y. 2013-14 is partly allowed and appeal of the assessee in ITA No. 121/Del/2026 for A.Y. 2017-18 is allowed for statistical purposes.